Trends and issues in the evolving service innovation policy

Dr. Jari Kuusisto FRONTIERS IN SERVICE CONFERENCE October 2-5, 2008 Washington, DC, USA
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Jari Kuusisto

Outline of the presentation
• Introduction and background • Economic performance of services • Arguing the case for service innovation policy • Key concepts and problem setting • Services and innovation policy • Developing effective service innovation policy • R&D in Services – review and case studies
• Some indications from business cases

• Concluding comments
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Introduction and background
• This paper seeks to highlight some key developments in service innovation policy • The presentation build on the following papers by the author:
• (2007) Innovation Policy project in Services – IPPS 2006-2007, Draft Policy Blueprint report, submitted for the DG Enterprise, European Commission. • (2008) R&D in Services – review and case studies, A paper submitted for the CREST • R&D in Services Working Group, DG Research, European Commission. • (2008) Services and Innovation - Evolving Service Innovation Policy, Drivers and Barriers, Horizontal and Framework Policies Stimulating Innovation in Service Enterprises, Forfás, Dublin, Ireland. • (2008) Towards High Performance Services - Implications for Innovation Policy, A Review of Research Literature, Commonwealth of Australia, Canberra.

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Economic performance of services
Various perspectives to the topic

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Services role in the economy
• Service sector contribution to aggregate production and employment keeps growing in developed economies
• They represent nearly 78 % of US economic output and a similar proportion of employment

• Demand for services is growing in faster rate than demand for manufactured products • Many knowledge based industries that are believed to be crucial to future prosperity, fall into the services sector
• There is a growing cohort of relatively poorly paid manual service workers providing essential support for the more high value added services and the economy as whole.

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Elements of economic performance
• Key elements of services economic performance
Services economic performance

Service industries - Enabling technologies - Opening of the markets Service occupations - Supply of relevant skills Service activities - Service functions across the industries

Globalisation - Offshoring of services - Competition on skills Services-manufacturing dynamics - Outsourcing - New business models Service innovation & productivity - Multidimensional innovation

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Arguing the case for service innovation policy

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Services are now recognised
• Policy makers are increasingly recognising that services have central role in the economy
• A well-functioning services sector is key to the overall economic performance of OECD countries and to the welfare of its citizens. • Reform of services sector policies provides an important opportunity for policy makers to strengthen employment, productivity and innovation.

Source: OECD, 2005, Growth in Services Fostering Employment, Productivity and Innovation

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There is a need for policy change
• Socio-economic importance of services is not reflected
• in services R&D which remains underdeveloped* • as do the public support measures for service innovation

• Current policies are biased towards manufacturing giving insufficient attention to non-technological R&D • This systemic failure needs to be addressed and it provides a rationale for service innovation policy
*According to official R&D statistics

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Service innovation policy rationale
THE SERVICES INNOVATION CASE

Intangibility leading to: High uncertainty levels Lack of transparency Limited use of patents Dominance of SMEs Fragmented markets Obstacles to trade and competition Limited role in R&D programmes

Need for better integration of services in innovation systems Lack of institutional recognition Reduced awareness of its potential High rates of failure and business death Lack of services !culture" Financial accounting bias against intangible assets

Source: Adapted from Rubacalpa (2006)
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There is a pressure to develop services
• Smile curve
• Intangible parts of the value chain are increasingly important revenue generators for manufacturing industry

Rate of return

The value of manufactured products is increasingly based on intangibles
E.g., brand value of a Volvo, BMW, Mercedes cars

R&D

Production

Sales

After-sale services

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Source: Takada, 2003.

Key concepts and problem setting
Service innovation in policy context

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Policy development
• Significant change in the policy scope
• From technology development towards much broader innovation policy agenda • Both direct and indirect policy measures are important

• Potential impacts are significant
• Many new industries as a policy target • Many new dimensions of innovation as a policy target

• All forms of innovation matter, technological as well as non-technological

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Challenges
• Novel policy area with very few existing instruments
• E.g. innovation vouchers that can be used for purchasing of expert services

• Organisations that are delivering policy have little if any experience in service innovation promotion
• They are facing a very steep learning curve

• Those who are benefiting from the existing innovation policies are not necessarily keen for the change
• Broader agenda and wider target groups means that policy attention and supports are spread across more thinly • More recipients that are sharing R&D funding

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Starting point - SERVICES
• Service innovation is multidimensional, and
• Any dimension can be driver, or hindrance to service innovation

Technology- and product related dimensions

Customer interaction related dimensions

Service innovations

Delivery system related dimensions

New network and value chain configurations

Organisation related dimensions J. Kuusisto, 2005

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Starting point - POLICY
• Any policy can can drive, or be hindrance to service innovation
• But very few policies recognise the influence they have on service innovation • R&D policies tend to have technology bias

Service innovation

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Service concept in statistics
• Innovation policy for services
• We are talking about many policies addressing innovation promotion across various service industries
Code NAICS Sectors (2002)
11 21 22 23 31-33 42 A g r iculture, Forestry, Fishing and Huntin g M inin g U t i lities C o n structio n Manufacturing Wholesale Trade 53 54 55 56 61 62 71 72 81 92 R e a l Estate and Rental and Leasing P r o f e s s ional, Scientific, and Technical Services M anagement of Companies and Enterprises A d m inistrative and Support and Waste Management and Remediation Services E d u c ation Services H e a lth Care and Social Assistance A r t s, Entertainment, and Recreatio n A c c o m m o d ation and Food Services O t h er Services (except Public Administratio n ) P u b l ic Administratio n
Source: NAIC Association (2008)

44-45 Retail Trade 48-49 Transportation and Warehousing 51 52 Informatio n F inance and Insurance

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R&D and innovation activities in services
• R&D in services is much broader
• Than the traditional R&D concept
Research institutions & education - Skilled labour - Basic and applied research, technological and socio-economic research

Equipment / technology supplier - Technology related R&D e.g., ICT

Service organisation - Internal R&D - other non-R&D activities aiming at services development

Client organisation - Joint R&D activities with the clients

Knowledge intensive services and external R&D - KIBS - RTO!s

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Regulation and markets © Jari Kuusisto, 2007

Developing effective service innovation policy

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Progress of service innovation policy
• Has already gained momentum in a number of developed countries, including
• Australia, Finland, Germany, Ireland, Netherlands, Sweden and the United Kingdom, and also at the European Union level.

• Several countries, OECD and EU, have launched high-level policy documents addressing service innovation promotion.
• E.g. Finland, Ireland, Japan and Australia are emphasising service innovation elements in their new innovation strategies.

• Non-technological and demand-driven innovation are recognised as essential
• In tackling urgent national challenges such as • Ageing population, international competitiveness and the renewal of manufacturing.
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Targeting policy on specific types of services
Prioritized service industries of national significance that could be further strengthened by means of innovation policy
• Japan - Health and welfare, child care support, tourism and attraction of visitors service, contents, business support, and distribution (six key sectors) • Germany - ICT related services, knowledge intensive services, hybrid services utilizing technology and innovative service elements • Finland - Business to business services, knowledge intensive business services, public sector services • Australia - Tourism and knowledge intensive services • Denmark / Sweden - Design and creative industries • Netherlands, UK - Creative industries • Norway - Design and tourism

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Promoting non-technological innovation more broadly
• Adopt problem solving approach
• Multi-faceted problems require multi-faceted solutions • Few problems can be solved by one policy actor • Need for joint actions and co-operation • Within government
• between levels and across departments

• With stakeholders

• Horizontal approach is key to service innovation policy

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Moving service innovation policy forward
• Linking the dimensions of service innovation systematically to policies and development tools
Dimensions of service inovation that needs to be addressed •!New & innovative service concepts • Delivery systems for services • Organisational development and innovations • New networks and value chains • Customer interaction • Technology Relevant Policy areas • Internal markets & competition • ICT and networks • Regulation • R&D and innovation • Education and skills • SME and enterprise • Enployment and qualifications • Sustainable development • IPR and IP management • Knowledge and statistics • Standards and regulations • Regional policy • Sectoral policies • Taxation Policy development tools • Innovation strategy • Policy frameworks • White papers • State budgets • Government committees • Informal networks and negotiation • Monitoring systems • Structurral development, (e.g., merging of ministries) Other inter-governmental activities • Mobilizing teams and networks • Developing shared networks • Building supportive structures • Maintaining momentum • Mobilising stakeholders

Service innovation

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R&D in Services – review and case studies
DG Research European Commission February, 2008 (DRAFT) Final report in print

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Report overview
• R&D in services report
 Introduction to services  Statistical overview  Literature review  Survey of policies in participant countries  Case-studies  Policy implications

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Project overview
Brief summary of the key results from the existing research

Survey of R&D in services in participant countries

Case studies in multinational enterprises R&D activities and future needs

Synthesis report with policy implications

Dissemination of the research results

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15 case studies from 9 countries
COUNTRY BELGIUM Name VADIS
Creax

Industry(i e s ) Consult i n g
Patent research, idea generation, innovation studies, methodological training, new technical marketing studies, and innovation software Contract Resear c h e-business, e-marketing, e-learning consultancy Software program for medical image management, and maintenance support Accountancy and consultin g Building systems, construction, services for industry, networks and IT Agricultural engines and harvesters Industrial maintenance and cleanin g Project management and real estate consultin g Software and related services Retail trade Strategic Communications Consultin g InfoSecurity Clinical Resear c h Education solution provisio n Electronic certificate service providing and information technologies security

No. of staff
15 20

Quality Assistance Defimedia Telemis

91 20 30 750 22000 8200 12600 850 650 23000 70 36 300 114 30

DENM A R K FINL A N D GERMANY

BDO ScanRevisio n YIT G r o u p Claas Deutsche Industrie Wartung Drees & Sommer Singular Logic Maxima LT Geelmyuden.Kiese Ekelö w TFS IES Education and Information Tech. In c . TURKTRUST Information Security Services Inc.

GREECE LITHUANIA NORWAY SWEDE N TURKE Y

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Public funding and R&D in services

• Biased towards businesses that are carrying out technology related projects
• such as software development, or services development in connection with manufactured products

• Public supports for traditional services was limited among the case businesses

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Number and status of dedicated R&D staff
• Typical service firms have very small numbers of full-time R&D staff, and much of the is carried out on part-time basis in connection with customer projects. • In the technology related services the number of full-time R&D staff was clearly higher than in service firms in general.

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R&D resources and their use
• The allocation and use of R&D resources portrays a wide variety of different practices
• Organisational and personnel development seems to play a strong role as an R&D activity. • Skills and competences development can be more important than new service development

• Technology related and software services had most formalised R&D processes, with budgets and dedicated staff in place
• In traditional and knowledge based services, internal development projects are the key form of R&D and these are not typically recorded as R&D costs

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Typical bottle-necks
• Cyclical nature of the business and lack of skilled personnel • Inefficient fragmented markets can create a barrier for the take up of new ideas • Too discipline-oriented organisation of R&D activities is not good for services development • Customers may prefer lowest price to improved services
• Benefits of new services can be demonstrated only after purchase

• Under developed service culture may hinder R&D in service businesses

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Intellectual property management
• Technology related and software services stand out
• They use patenting, copyrights, standardisation, and software licensing as protection methods

• Otherwise services IP protection is less formally organised • Typically competitors copy new service outcome in a couple of months time
• Importance of lead-time advantage • Importance of IP management and informal IP protection

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Public support for R&D in services
• Public research programmes could support R&D in services much more than they currently do • Co-operation with research institutions is more appropriate in the fundamental level R&D projects
• For instance, in the development of theoretical frameworks that the business can utilise in its business strategy development.

• In more applied research, co-operation with individual academics were seen as more appropriate • Planning horizon in public research is much longer than the development cycle in the businesses. • Too fixed research questions can be a problem
• In businesses the research problems often evolve during the process
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Future needs
• Increasing need for market research groups that are able to track opportunities for new services and estimate when the demand for new services will emerge • Standards that can facilitate competitive markets and act as drivers of innovation

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Concluding comments

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Service innovation policy approach is evolving
• Towards broader perspective and horizontal approach

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©Jari Kuusisto

Thank you for your attention!
jari.kuusisto@sci.fi

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